Hello friends,
This last week was dominated by the spring of the market finally uncoiling and, as often happens, the majority of the steam was released through earnings reports, or rather speculator’ reactions to them. A slew of down-revised guidance and disappointing financials has hit various industry leaders, and selling has come into the market at large.
Problem is, the good old over-crowded Big Tech trade, with the top 5 tech companies predicating more than 20% of the index movements, is once again masking the damage seen across the market.
Compare the capitalization-(and thus heavily FAANGM-)weighted S&P500, vs. the equal-weighted RSP. And the latter does not even reflect how most stocks are faring in the mid- and small-cap fractions of the market, as e.g. IWM (below) shows:
At a time where the majority of the high-quality stocks of the market collapse or outright blow up and stocks at 52week Low prices outpacing those at 52week Highs by 4:1, complacency (VIX at <16!!!) is kept up by speculators piling into META and MSFT, the very stocks that keep the indices afloat and thus cause the appearance of a market rally that is precariously thin.
You could argue why this rally is happening, and there are a lot of different reasons – funds fleeing the financials sector and piling into strong balance sheet stocks, retailers’ ever-lasting believe in their favorite darling stocks, dumb money interest in any mentioning of “AI” and “stocks” in the same sentence (which seems to have a similar effect on speculators as the suffix “.com” had in the late 90s tech bubble), and more. It doesn’t matter eventually, as it is happening.
Unfortunately, the “dumb” money can keep markets rallying longer than anyone would think or like. A high short interest in various futures and options markets is also not helping to facilitate a much-needed selloff. We’ll just have to keep observing, however the action of the last week was another shot across the bow that the market environment has been hostile, is hostile, and keeps getting more so.
This report will be rather short, as the crux lies in seeing that the leaders are dying, and headless chicken may run around … but not in a straight line, and it won’t get far.
Leading growth sells hard, leading defensives stay strong
Tech as a group, due to the high complacency of the market, is clearly the winner of the most over-crowded trade reward. However, if your glance swerves from the FAANGM Kumbaya rally, you’ll see first cracks & weakness appearing in various leading big-tech names, such as FTNT, PANW, and especially the semiconductors (XSD). We’ll look at these in more detail below, as many of the current growth leaders are from this industry.
Additionally, transports sold off very hard on bad earnings in the bigger stocks (e.g. UPS, ODFL). Transports are usually among the leading groups post a recession, and this is anything but discounting the end of one.
Meanwhile, the defensives and value plays that have been dominating the market for many months now have shown no sign of attracting less money – in fact, rather the opposite.
Biopharma & wider healthcare (e.g. LLY, VRTX, MRK) and staples, specifically food stocks, continue leading the market. Check out charts of PEP, MNST, MDLZ, HSY or LW – a market where Pepsi and frozen food staples stocks outperform the leading growth names is not an environment wasting a lot of time and money on.
Retail and homebuilders hold strong(er)
As before, the rare retailer stock (ASO, DKS, DECK) has been recovering well from the bear market, and some are trading at new High prices. This is great for the industry, and solid group support, should newcomers such as ONON show more strength in the future. However, even here, negative surprises can happen (e.g. CROX), emphasizing the precariousness of the market. Homebuilders such as PHM were outperformed the wider market at large, but there are no actionable setups and without confirmation from other industries, you can’t read too much into this dynamic at the moment.
Growth leaders implode
Last week’s most impressionable developments were the almost simultaneous blow-ups of growth leaders PI, ALGM, MBLY (all semi-conductors, following negative action earlier in AEHR, CRUS and RMBS) and the turn-around stock FSLR (solar industry, following ENPH’s earlier gap-down on earnings).
All four of them blew up severely from faulty digestion patterns (wedging and/or erratic price action, bad volume profiles, lack of follow-through buying), action that was reflected by the wider group (XSD, see above) and other big-cap stocks in the industry (e.g. LSCC). Equally, sensor produced IOT experienced serious volatility and selling after a small digestion that was used by holders for profit-taking and recovery of funds. Not something you’d like to see in a great market, and generally, the recent rally in IOT (which has strong overhead selling supply and a no-earnings profile) once again emphasizes the complacency of the market participants, believing it is still 2020.
With only ACLS holding from the semi-conductor group (which is also 2 days out from earnings) and other leaders SWAV and LNTH unable to form proper digestions before earnings come in in a couple of days, I expect similar action. Even if not, 2-3 stocks don’t make a market, and last week’s reduction of my watchlist to these few leaders that are holding up by a thread is enough of a red flag to not try to force the market to do something that has to happen by itself (speaking in Zen terms :-))
As before – I’m looking for opportunities elsewhere such as in the Japanese or Gold markets, as US stocks are having one of their worst times since long.